Why Should We Care If Oil Giants Get Crushed?

April 22, 2020


With the whole world rubbernecking at the scene of crude oil's crackup, you could lose sight of why it matters. Listening to Trump fret about it tells us nothing. He has endorsed collusion by energy suppliers, the better to push prices back up to...whatever. But he hasn't said why this would be a good thing. It's not as though we're all feeling sorry for the likes of Exxon and BP just because the value of their inventory has imploded. Unfortunately, the benighted hacks who invent the news are too lazy to give us the real story. They've never been able to explain, even, why the price of gasoline sometimes fluctuate violently over a range of $1.00 or more, or why natural gas prices can crash without reducing our heating bills by a dime.

Paper Shufflers Rule!

Anyway, in case you missed an earlier commentary published here, crude-oil assets are the very real collateral for much of the aggressively leveraged borrowing that has taken place in global financial markets. The $1.5 quadrillion dollar derivatives market, for example. Just what percentage of this sum has been grown from oil in the ground is open to speculation. Suffice it to say, its dollar value would likely dwarf the approximately$100 trillion value of goods and services produced on this planet. So why do we need a financial edifice that is more than ten times the transaction value of actual things? The simple answer is that the main business of these times is not making things or performing tasks for a fee, but shuffling paper. Mostly, this shell game comprises hyper-leveraged financial instruments whose relationship to the collateral from which they've sprung is as inscrutable as string theory.

So there you have it: The collapse of oil prices matters because, along with real estate, energy assets underpin most of the world's debt. The Fed may be able to pump out enough funny money to keep the Dow from falling straightaway to 5,000. But prevent a global debt bubble with a notional value 50 times the size of the U.S. stock market from collapsing? No way.

Rick Ackerman


Disclaimer - This email is for information purposes only and should not be considered personalized advice or a solicitation to buy or sell any securities.


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